Retail investors in Germany should expect to get annual returns of between 3%-8% from soft-protected structured products, according to the latest monthly survey by the Deutscher Derivate Verband (DDV).

Investors are looking for defensive investments that still elicit a positive return of 3%-5% per year taking into account that "the interest rate has been so low for so long", according to Adrian Peter Hurler, executive director, securities division at Goldman Sachs International in Frankfurt. "Depending on the underlying and the maturity, risk buffers of 25% or more are possible: for example, express certificates [autocallables] on the Eurostoxx 50 currently offer a coupon of 4% annually with a risk buffer of 30%."

According to Klaus von Massenbach (pictured), cross-asset solutions, institutional sales and marketing for Austria and Germany at Societe Generale, "the yield range we see investors are interested in is between 4%-8% pa for soft-protected products".

The DDV report states that demand for yield has increased in the German market, with 62% of retail investors marking this feature as the most important influence when buying structured products, nearly 10% higher than last year. "In the case of online surveys conducted on private investors, the yield expectation was usually between 3%-7% per annum," said Lars Brandau, managing director at the DDV. "Investors who expect more are among the highly risky, well-trained, self-directed type, who buy not only investment certificates, but also speculative leveraged products."

The demand includes reverse convertibles, particularly linked to German blue chips, according to Kemal Bagci, a Frankfurt-based sales person for exchange-traded solutions at BNP Paribas. "Expected yields are beyond 6% pa," said Bagci. "Maturities average between six months and one year. We also see demand in express certificates on similar underlying in a similar yield range."

According to the issuers, the preferred barrier for soft protection products is around 60%-75%. "We see the largest demand for risk buffers of 30%-35% for products mainly linked to single indices, as these products offer attractive return opportunities, despite the partial protection," said Hurler. While Von Massenbach indicates a similar preferred range for barriers - of 65%-75%. According to Bagci, "numerous products we currently offer in the primary market have barriers in the 40% to 60% range for express certificates".

The findings of the survey suggest that retail investors have accepted greater risks in less volatile market phases, according to Brandau. "As soon as the market becomes restless and there are violent fluctuations or even a crash, the barriers are chosen rather conservatively so as to have as large a buffer as possible," said Brandau. "During the last financial crisis, many investors had chosen barriers that could not withstand the severe price losses. The corresponding products could not play their desired advantages and there were some losses. The follow-up focused on products with 100% capital protection."

Hedging was also prominent in investor's minds, with 20% of those surveyed reporting that they use structured products predominantly for hedging. "After the boom in the stock market of recent years, investors have become increasingly concerned about the potential for share prices to fall," said Hurler. According to Bagci, "cautious investors usually hedge the Dax with short turbo positions or warrants: the euro/US dollar is hedged frequently; less so single stocks". "However, demand is usually strong in gold products, seeking exposure to safe havens," said Bagci.

Tradability and the large choice of underlyings were the next most common reasons to buy a structured product, with over 10% of those surveyed buying because of tradability and 8% of respondents valuing the amount of underlyings and asset classes.

But, first and foremost, it is about investment of the investor, according to Brandau. "The money used should increase, but with a limited or at least manageable risk," said Brandau. "Most private investors in Germany are concerned with the long phase of asset building, followed asset preservation. For the vast majority of certificate investors, it is not primarily a matter of profit maximisation."

The DDV poll collected responses from 776 participants and was conducted in collaboration with several major financial portals. A pdf version of the survey is available at this link.

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